Deposit insurance and credit union lending

We exploit an exogenous change in the coverage of insured deposits following the passage of the Emergency Economic Stabilization Act (2008) to investigate the impact of deposit insurance on the volume, composition and quality of credit union lending. Using a difference-in-difference approach, we find changes in the volume, composition and riskiness of credit union lending. Specifically, we find that affected credit unions increase total and unsecured lending, leading to a decline in loan quality. Overall, our results suggest that an increase in the maximum coverage of insured deposits induces credit unions to lend more at the expense of loan quality.     

Determinants of Transactional Internet Banking

The decision of credit unions in the United States to adopt transactional web-based services is consistent with profit-maximization behavior. Credit unions adopt transactional internet banking services when they provide a higher proportion of consumer loans and when there is increased competition from other financial institutions. They adopt transactional internet banking to attract new customers. The larger the credit union the higher the probability of adoption of transactional internet banking. The probability of adoption of transactional banking is directly related to credit unions’ efficiency and indirectly related to loan delinquencies. We also find that the probability of credit unions offering transactional internet banking is positively related to the percentage of the young population in the counties where credit unions are located.     

The Effect of the Common Bond and Membership Expansion on Credit Union Risk

This paper empirically examines differences in credit union risk profiles based on membership type and membership expansion via select employee groups (SEGs). We find that (1) occupational credit unions have a greater exposure to concentration risk, which they hedge by holding greater proportions of capital, (2) the presence of SEGs is negatively related to credit union capital ratios and positively related to loan–to–share ratios, and (3) the number of SEGs and the proportion of loan delinquencies are positively related. We conclude that credit union membership expansion results in reduced concentration risk and expanded investment opportunities, but also dilutes the informational advantages associated with tight common bonds.     

Credit unions and earnings management to mitigate political scrutiny over tax-exempt status

In this paper, we examine whether credit unions manage earnings to mitigate political scrutiny. In particular, we study whether credit unions increased loan loss provisions to decrease earnings around a 2005 congressional hearing on the efficacy of credit unions’ tax-exempt status. On average, we find evidence consistent with credit unions managing earnings downward via the loan loss provision in the quarters leading up to and surrounding the congressional hearing. In addition, we find that credit unions with higher earnings before the loan loss provision engaged in more downward earnings management than credit unions with lower earnings before provision. Our findings contribute to the literature examining the use of downward earnings management to avoid political scrutiny and the banking literature. Likewise, our results inform the continued debate as to whether credit unions should be tax-exempt.     

BLACK-CONTROLLED CREDIT UNIONS: A COMPARATIVE ANALYSIS

This paper is a comparative study of black- and nonblack-controlled credit unions. The results indicate operational differences that distinguish black credit unions from previous results for black banks and black savings and loan associations. Many of these differences can be attributed to institutional characteristics resulting from the three distinct types of credit unions. The major contribution of the paper is that the striking similarities between black banks and black savings and loan associations do not in general apply to black credit unions.     

The market for private student loans: an analysis of credit union exposure,risk, and returns

Beginning in 2011, credit unions in the United States have been required to report in their quarterly call reports their holdings of private student loans. Since this time, private student loans have been the fastest growing loan product among credit unions. The empirical results here indicate credit unions respond to external market forces and internal exposure to interest rate risk in their decision to hold private student loans. The effect of which, to date, has led to lower returns on their assets and no effect on overall risk. Credit unions looking to diversify their loan portfolio should do so with caution. Private student loans being in deferral reduce both delinquency and charge-off rates, which will rise over time with their seasoning and as interest rates rise.     

Prudence and financial self-regulation in credit unions in Northern Ireland

Credit unions in Northern Ireland are subject to a unique combination of statutory oversight and self-regulation. This paper investigates the association between prudence and the monitoring of financial ratios by credit union trade associations. We find that compliance with the mandated level of capital reserves is uniformly high, regardless of the existence or extent of self-regulation. However, after controlling for cross-sectional differences in profitability, age, size, growth and common bond type a positive association exists between self-regulation and financial ratios measuring prudence and loan book quality. These findings have policy implications for the regulation of credit unions in Northern Ireland and elsewhere regarding potential regulatory cost savings from reliance on self-regulation provided by trade associations.     

The effect of mergers on credit union performance

The motivation for mergers in the credit union industry differs from the commercial bank industry due to the lack of residual claimants to benefit from wealth gains. In the cooperative ownership environment of credit unions, the owners/members gain utility via the rates offered for loans and deposits. Credit union regulators also gain utility when mergers remove risky credit unions from the industry. We measure these utility gains using the event study method of Bauer [Bauer, K., 2008. Detecting abnormal credit union performance. Journal of Banking and Finance 32, 573–586] employing quadrant tests based on a multivariate test of equality of centroids. We find gains to the owners/members of the target credit union and to the regulators but not to the acquiring firm. We posit that the acquiring credit unions may encounter regulatory pressure to merge. In addition, the owners/members of the acquiring firm may avoid potential disutility in the cooperative insurance environment were the target firm allowed to fail.     

Do credit unions use their tax advantage to benefit members? Evidence from a cost function

This paper examines whether the credit union income tax subsidy is passed along to members or consumed by managers. To that end, we estimate a translog cost function for credit unions and mutual thrifts that is tailored to the unique objectives of mutually owned depository institutions. We find that credit unions with residential common bonds have higher costs than mutual thrifts, but single common bond occupational and associational credit unions are more cost efficient. Thus, it appears that residential credit unions engage in expense preference behavior and hence redirect some portion of their tax benefit away from members.     

Problems in applying discriminant analysis in credit scoring models

Since the mid-1960s financial institutions and other creditors with increasing frequency have applied credit scoring and related loan review procedures to appraise the creditworthiness of loan applicants. The passage of the Equal Credit Opportunity Act and promulgation of the Federal Reserve's Regulation B to implement this act place an important burden on institutions that are subject to the regulation and that employ screening models to ensure that their procedures are statistically and methodologically sound.This paper reviews the types of credit scoring models that have been described in various journals. It gives particular attention to the methodological approaches that have been employed and the statistical problems associated with those models using discriminant analysis techniques. The paper points out that the statistical scoring models discussed in the literature have focused primarily on the minimization of default rates, which is in fact only one dimension of the more general problem of granting credit. To the extent that for the lender profit maximization or cost minimization is, or should be, the objective of a scoring model, then most of the applied literature seems incomplete. The paper also shows that, even ignoring these shortcomings, the models used typically suffer from statistical deficiencies. And it finds that some of the problems of these models seem to be inherent in the discriminant analysis techniques employed or seem to be hard to remedy, given the state of the art concerning estimation and sampling procedures.     

Credit Unions: A Theoretical and Empirical Overview

In 2009 there were over 49,330 credit unions across 98 countries with more than 184 million members and approximately $1,354 billion in assets. There is a great diversity within the credit union movement across these countries. This reflects the various economic, historic and cultural contexts within which credit unions operate. This paper traces the evolution of the credit union movement. It examines credit union objectives, and considers issues relating to efficiency, technology adoption, product diversification, merger, failure and demutualization. The regulatory environment within which credit unions operate is also explored under the themes of interest rate regulation, common bond requirements, taxation, deposit insurance and capital regulation. The overview also considers demutualization and the costs and benefits to credit unions of altering their organizational form.     

The federal deposit insurance fund that didn't put a bite on U.S. taxpayers

Unlike the Federal Savings and Loan Insurance Corporation and the Bank Insurance Fund, the National Credit Union Share Insurance Fund (NCUSIF) survived the 1980s without falling into a state of accounting insolvency. This paper analyzes how differences in incentive structure constrain the attractiveness of interest-rate speculation and other risk-taking opportunities to managers and regulators of credit unions. Despite these better incentives, robust present-value calculations establish that NCUSIF fell into economic insolvency during the mid-1980s.Besides calculating the extent of this insolvency, the paper also seeks to explain why, after NCUSIF became insolvent, it could rebuild its reserves without an explicit or implicit taxpayer bailout. Our explanation turns on cross-industry coinsurance responsibilities and the shallowness of the fund's observed insolvency relative to industry net worth. We identify forces in the decisionmaking environment tending to limit the depth and duration of unresolved insolvencies at individual credit unions. Managerial opportunities to benefit personally from taking risks that would flow through to NCUSIF are constrained by difficulties in converting a credit union to stockholder form and by the intensity of proactive monitoring of troubled credit unions by sister institutions and other private coinsurers. We conjecture that expanded use of coinsurance and private monitoring could reduce taxpayer loss exposure elsewhere in government deposit insurance systems.     

Credit unions vs. commercial banks,who takes more risk?

A unique feature of the financial services industry is that both shareholder-owned banks and member-owned credit unions coexist and compete against each other. In this study, we investigate two research questions. First, we compare risk-taking by banks and credit unions, with an additional consideration as to how regulatory oversight (state or federal) relates to such risk-taking. Second, we examine how competition affects the difference in risk-taking between these two types of financial institutions. To answer both questions, we rely on a matched sample (by loan type, size, and county) of commercial banks and credit unions, covering the period between 2010 and 2017. We use three empirical proxies for risk-taking, the Z-score, measuring an institution’s insolvency risk, as well as the ratios of non-performing loans to total loans and loan charge-offs to total loans, measuring the credit risk. Our results suggest that banks tend to engage in more risk-taking than credit unions; however, state regulatory oversight reduces the risk-taking gap, especially in terms of the Z-score. We further find that competition induces different risk-taking behaviors in banks and credit unions. Our results are robust to several alternative specifications.     

Do tax benefits conferred to Sub-S banks affect their deposit or loan rates?

Positive economics predicts that Sub-S banks, with no taxes paid at the corporate level, will price their products lower than otherwise identical C corporation banks in a competitive environment. Alternatively, if banks price bundle their products, Sub-S tax benefits might have little (no) effect on product rates. The empirical analysis finds that Sub-S deposit (loan) rates are equal to or lower (higher) than similar C corporation bank rates. Thus, there is little evidence of any tax benefits accruing to Sub-S bank customers. In contrast, tax-exempt credit unions do offer higher deposit rates and lower loan rates than C corporation banks.     

Scale Economies in Credit Unions: Accounting for Subsidies Is Important

In 1998, the Credit Union Services Corporation Australia Limited (CUSCAL) recommended that Australian credit unions with assets below $5 million should consider merging with larger credit unions. This industry position is at odds with empirical studies, which find little evidence of increasing returns to scale in credit unions. However, an important bias in previous studies of scale economies in credit unions has been the omission of credit union subsidies. This paper shows that the failure to account for subsidies biases the results toward finding diseconomies of scale. After correcting for the subsidy bias, there is very strong evidence of increasing returns to scale in a sample of New South Wales credit unions, supporting the industry recommendation.     

U.S. credit union motivation for involvement in the first-mortgage market

U.S. credit union involvement in first-mortgage lending has grown rapidly since extended lending powers were granted through several regulatory changes from 1977 to 1984. The purpose of this study is to examine credit unions that initiated first-mortgage lending programs during the period 1983 through 1988, and attempt to identify factors or variables that influenced the decision to become active in the first-mortgage market. The results indicate that there are certain factors that distinguish credit unions that become involved in first-mortgage lending from those that do not. Specifically, the size of a credit union, a full-service orientation, and a residential type of membership bond were factors consistently significant in their relationship to first-mortgage initiation.     

The diversification and financial performance of US credit unions

For US credit unions, revenue from non-interest sources has increased significantly in recent years. We investigate the impact of revenue diversification on financial performance for the period 1993–2004. The impact of a change in strategy that alters the share of non-interest income is decomposed into a direct exposure effect, reflecting the difference between interest and non-interest bearing activities, and an indirect exposure effect which reflects the effect of the institution’s own degree of diversification. On both risk-adjusted and unadjusted returns measures, a positive direct exposure effect is outweighed by a negative indirect exposure effect for all but the largest credit unions. This may imply that similar diversification strategies are not appropriate for large and small credit unions. Small credit unions should eschew diversification and continue to operate as simple savings and loan institutions, while large credit unions should be encouraged to exploit new product opportunities around their core expertise.     

Financial literacy and over-indebtedness in low-income households

Financial literacy can explain a significant proportion of wealth inequality. Among the key components of financial literacy are numeracy and money management skills. Our study examines the relative importance of these components in the determination of consumer debt and household net worth among credit union members in socially disadvantaged areas. The main finding from our analysis is that money management skills are important determinants of financial outcomes but that numeracy has almost no role to play. This result adds to a recent US-based behavioural finance literature on the role of attention and planning in consumer finance. Findings are found to be robust when the sample is reduced to only those who have a clear role in household financial decision-making and also when controlling for potential endogeneity. Our findings have policy implications in the UK and elsewhere as credit unions across the world are important players in national financial literacy strategies.     

Theory and evidence of the impact of Equal Credit Opportunity: An agnostic review of the literature

As amended in 1976, the Equal Credit Opportunity Act (ECOA) outlawed discrimination in granting credit on the basis of race, color, religion, national origin, sex or marital status, and age. This article examines the difficulties of transforming the goals of the act into effective regulation, looks at what economic theory implies about the possibility of discriminatory behavior in credit markets, and reviews existing statistical evidence concerning discrimination in consumer credit markets. On balance, theory predicts little impact for the act, although a few cases are identified in which the ECOA could have an effect. Available studies have failed to produce much evidence of systematic discrimination. Moreover, there is little evidence that membership in ECOA-protected groups provides information about lack of creditworthiness or that the act has increased credit availability to anyone. Thus, the ECOA would not appear to have a profound effect on the operation of consumer credit markets.The views expressed in this article are those of the authors, not of the Federal Reserve Board or its staff.     

Credit Unions in Britain: A Time for Change

As member-owned, not-for-profit financial institutions, credit unions are an important instrument of public policy, particularly in pushing forward measures to tackle financial and social exclusion. Historically, the credit union movement in Great Britain has been hampered by a number of factors, including a lack of leadership, a cohesive identity and regulatory impediments. Recent legislative review and change has provided credit unions with the opportunity to grow and extend the scale and scope of services they can offer to their members. However, policy-makers should be aware that funding initiatives to support credit union development might undermine their self-help cornerstone and weaken the future development of the movement.